Explaining the advantages of owning a whole life insurance policy can be self-evident, and therefore purchasers are often excited by the product when they first explore it. However, hesitation comes when the difference in premium costs and payment schedules in comparison to other forms of permanent life insurance are introduced.
While it’s true that whole life can have higher premiums and less flexible payment schedules, it still offers unparalleled long-term risk management, remaining the most popular permanent life insurance purchased today. In this article, we’ll explain why whole life insurance has higher premiums and less flexible payment schedules and what you receive in return for those terms.
Insurer and Consumer Risk Balance
First, we should consider that with any product, if you are paying more, you should be receiving more. With whole life insurance, this is the case.
The purpose of whole life insurance is to guarantee lifetime protection that never expires at premiums that never increase. That is the benefit that the purchaser receives. To provide this product, insurance companies rely on calculations on the cost of money and current mortality rates.
As a policy holder gets older, their risk of dying increases and the financial risk to insurance companies increases as well. Consider a 10-year term policy for a 25-year-old person. They may have very low premiums, but if they want to continue to keep their insurance past the 10-year term, their premium rates will significantly increase. In a whole term policy, those later-in-life premiums are accounted for up front, effectively weighting the premiums initially to prevent them from skyrocketing in the future. Additionally, part of the initially higher premium accumulates to become an investment asset that the purchaser can borrow against, known as the “cash-value” of the policy. The cash-value of the policy increases every year premiums are paid, and can be a valuable asset to draw from throughout your lifetime.
Participating Policies
Some whole life policies have contractual terms that allow the policy owner to take part in the profits insurance companies make.
When a life insurance company experiences lower than anticipated costs for insuring (lower than expected mortality rates) or outperforms its expected returns for its investments, it pays a portion of those profits to the policy holders that have policy’s that include these terms. These dividend payouts can be used to pay premiums, purchase paid up blocks of future insurance payments which increases cash-value, or they can be withdrawn as cash. While these payouts are not guaranteed, strong, well-maintained companies have been known to make these payments without interruption for decades.
“Vanishing” Premiums
One of the most interesting things about a whole life policy is that if it is well managed, and held long enough, its cash-value can grow enough to eventually pay the premiums. These “paid up” policies can provide the policy holder with protection for life, all while contributing no additional payments.
As always, one should seek professional counsel when considering purchasing a whole life insurance policy in order to make sure your policy meets your personal financial needs and goals. Considering the dividends, cash-value, and favorable loan conditions of a whole life policy, it can be a very valuable and flexible tool in your financial portfolio.
Richard S. Bernstein, CEO of Richard S. Bernstein & Associates, Inc., West Palm Beach, is an insurance advisor for high net worth business leaders, families, businesses, municipalities, and charitable organizations. An insurance advisor to many of America’s wealthiest families, he is a writer, trusted local and national media resource and expert speaker on estate planning and health insurance. Visit his website at www.rbernstein.com. To read more of his reports — Click Here Now.
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